A Step-By-Step Guide To Investing In Cryptocurrency

Investing in cryptocurrency is risky, but potentially rewarding. If you're thinking of investing, it's important to understand the basics of this unregulated digital currency and the steps you need to take to get started.

What is cryptocurrency?

Cryptocurrency is a virtual currency that is secured by blockchain technology. It doesn't rely on a central authority to verify transactions or create new units, but instead uses cryptography to prevent counterfeiting.

How do you invest in cryptocurrency?

Firstly, you need to understand the asset class and the need for investment. Given the high volatility of the crypto market, it's recommended that only a small percentage of your portfolio is allocated to this type of investment.

Next, you need to choose which cryptocurrency to invest in. There are thousands of options, but some of the most well-known include Bitcoin, Ethereum, Dogecoin and Cardano.

Once you've decided on a cryptocurrency, you need to choose a platform to buy it from. You can either use a dedicated cryptocurrency exchange or buy from another peer who is selling their current holding.

After purchasing your chosen cryptocurrency, you need to store it in a crypto wallet. This is a software program that stores the private and public keys that connect you to the blockchain where your cryptocurrencies exist. There are several types of wallets, including hot wallets (connected to the internet) and cold wallets (offline).

Finally, you need to secure your crypto wallet, especially if you're using it to buy products or if it's a hot wallet. Using a VPN and data encryption can help ensure your transactions are secure and anonymous.

Other things to consider

It's important to remember that the past performance of a cryptocurrency does not guarantee future results. Cryptocurrency prices are extremely volatile, and you need to be prepared for large price swings.

You should also only invest what you can afford to lose, as there is a risk that you could lose your entire investment.

Additionally, it's a good idea to research the cryptocurrency you're considering, understand how much money has already flowed into it, and be aware of any regulatory changes that could affect its value.

Understand what you're investing in

Before investing in cryptocurrency, it is crucial to understand what you are investing in. Cryptocurrency is a digital or virtual currency underpinned by cryptographic systems, which enable secure online payments without third-party intermediaries. The term "crypto" refers to the encryption algorithms and cryptographic techniques that secure these transactions, such as elliptical curve encryption, public-private key pairs, and hashing functions.

At its core, cryptocurrency is based on blockchain technology, a distributed database shared and verified by a network of computers. Each computer, or node, maintains a ledger of transactions, with each block containing a set of independently verified transactions. This decentralized structure allows cryptocurrencies to exist outside the control of central authorities and governments, making them theoretically immune to interference or manipulation.

The advantages of cryptocurrencies include cheaper and faster money transfers, improved security, and the removal of single points of failure. Additionally, cryptocurrencies can be used to generate returns, streamline remittances, and enable pseudonymous transactions. However, there are also disadvantages, such as price volatility, high energy consumption for mining, and the potential for criminal activities.

When considering investing in a particular cryptocurrency, it is essential to understand its purpose and category. Some common types include utility tokens, transactional tokens, governance tokens, platform tokens, and security tokens. For example, XRP and ETH are utility tokens that serve specific functions on their respective blockchains. On the other hand, Bitcoin is a well-known transactional token designed to be used as a payment method.

Another critical aspect to consider is the regulatory status of cryptocurrencies. While they are considered legal in many countries, the lack of clear regulations and their decentralized nature can make them susceptible to fraud, hacks, and regulatory changes. Therefore, it is essential to carefully research any digital coin before investing and be aware of the associated risks.

Overall, investing in cryptocurrency carries a higher level of risk compared to traditional investments. The prices of cryptocurrencies are highly volatile, and there is a possibility of losing your entire investment. As such, it is crucial to carefully evaluate your risk tolerance, conduct thorough research, and only invest what you can afford to lose.

Choose a cryptocurrency

Choosing a cryptocurrency to invest in can be a challenging task, especially given the sheer number of options available. Here are some key considerations to help guide your decision-making process:

Longevity and Platform Potential:

Look for cryptocurrencies that appear to have longevity in mind, considering both the product and the development team. Ask yourself: will this cryptocurrency still be relevant and in use in several years? Are there competing services that can easily outperform this project? Is the development team committed, and does their roadmap align with your investment goals?

User-Centric Design:

Successful cryptocurrencies often prioritize the end user's experience, ensuring that their platform is simple, intuitive, and accessible. The applications that will win out are those that optimise their service to be as user-friendly as possible, without requiring users to understand the complex technical details behind the application.

Market Capitalization and Liquidity:

Market capitalization, calculated by multiplying the price per coin by the total number of coins in circulation, is a critical factor in determining a viable crypto investment. A high market cap indicates strong investor confidence. Additionally, consider the liquidity of the cryptocurrency, as low liquidity can make it challenging to exit your position.

Use Cases and Real-World Adoption:

Evaluate the use case and real-world applicability of the cryptocurrency. Consider the scale of adoption needed for the project to cover its operational costs and whether the tokenomics make sense in relation to the product.

Development Team and Community:

Assess the background, skillset, and track record of the development team. Are they working actively on the project, and is there a vibrant community of developers, validators, and users engaged in the project's ecosystem?

Security and Transparency:

Security breaches and a lack of transparency can severely impact the value of a cryptocurrency. Evaluate the potential for human errors, such as poorly written code, and consider whether there are any critical access points or single points of failure that could pose risks.

Remember, investing in cryptocurrencies is inherently risky, and it's important to do your own research and only invest what you can afford to lose.

Select a cryptocurrency exchange

With around 500 cryptocurrency exchanges to choose from, selecting the right one for your needs is essential. Here are some key considerations to help you make an informed decision:

• Reputation and Security: It is crucial to choose a reputable and secure exchange to protect your funds and personal information. Look for exchanges with strong security protocols, insurance for user funds, and compliance with relevant regulations. Be wary of scams and fraud, and always research the exchange's reputation, security history, and user feedback.
• Supported Cryptocurrencies: Consider the range of cryptocurrencies offered by the exchange. While most exchanges support Bitcoin and Ethereum, some provide access to a wider variety of altcoins and smaller-cap tokens. Choose an exchange that aligns with your investment goals and interests.
• Fees: Cryptocurrency exchanges typically charge trading fees, withdrawal fees, and other transaction fees. Compare the fee structures of different exchanges, as high fees can eat into your investment returns. Look for exchanges with competitive and transparent fee structures.
• Payment Methods: Different exchanges offer varying payment options for purchasing cryptocurrencies. Some support bank transfers, credit/debit cards, and PayPal, while others may only accept cryptocurrency for purchases. Choose an exchange that suits your preferred payment method.
• User Experience and Customer Service: Consider the user interface and how easy it is to navigate and execute trades. If you're new to cryptocurrency, look for exchanges with beginner-friendly platforms and robust customer support.
• Advanced Features: If you're an experienced trader, explore the advanced features offered by the exchange. These may include margin trading, futures trading, staking, lending, and more. Ensure the exchange provides the tools and functionality you need for your trading strategies.
• Liquidity and Trading Volume: A high-volume exchange with ample liquidity can provide better pricing and faster trade execution. Lower-volume exchanges may result in slippage, leading to less favourable trade prices.
• Regulation and Compliance: With the recent collapse of FTX and ongoing regulatory issues, it's essential to choose an exchange that complies with relevant laws and regulations. Check if the exchange is licensed to operate in your country or state and review its history with regulatory authorities.
• Kraken: One of the oldest crypto exchanges, offering a wide range of coins, competitive fees, advanced trading features, and good customer service.
• Coinbase: Beginner-friendly exchange with an easy-to-use interface, a large number of supported cryptocurrencies, and strong security measures.
• Crypto.com: Supports over 350 cryptocurrencies, offers a user-friendly mobile app, and provides a range of crypto products and services.
• Binance: One of the largest exchanges by trading volume, offering a vast array of cryptocurrencies and derivatives trading.
• Gemini: Emphasizes security and compliance, insures user funds, and is available in all 50 U.S. states.
• BitMart: Supports over 1,500 cryptocurrencies, ideal for traders interested in altcoins and smaller-cap tokens.
• Cash App: Mobile banking app that allows users to buy, sell, and store Bitcoin seamlessly.

Set up a digital wallet

Setting up a digital wallet is a crucial step in investing in cryptocurrencies. Here is a detailed and comprehensive guide on how to set up a digital wallet:

• Choose a wallet type: There are several types of cryptocurrency wallets, including software, hardware, and paper wallets. Software wallets can be further categorized into desktop, mobile, or online wallets. Desktop wallets are installed on a PC or laptop and offer high security but are vulnerable to hacking or viruses. Online wallets are cloud-based and accessible from anywhere but are controlled by third parties, making them more susceptible to hacking. Mobile wallets are app-based and convenient for transactions but offer limited features. Hardware wallets store private keys on a physical device like a USB and offer enhanced security. Paper wallets are offline and provide a high level of security by storing your public and private keys physically.
• Select a wallet provider: Choose a reliable and trustworthy wallet provider that suits your needs. Consider factors such as security, ease of use, compliance with regulations, and compatibility with your preferred cryptocurrencies. Some popular options include Coinbase, Ledger, and Trezor.
• Create a wallet address: Follow the instructions provided by your chosen wallet provider to create a new wallet address. This address serves as your unique identifier on the blockchain network and allows others to send funds securely to your wallet.
• Secure your private key: Your private key is crucial for accessing and managing your cryptocurrency funds. Store it in a safe and secure place, such as an offline device or paper printout, to prevent unauthorized access.
• Explore the user interface: Familiarize yourself with the features and functionalities of your chosen wallet. Navigate through the options available to understand how to send, receive, and monitor your cryptocurrency balance.
• Deposit funds into your wallet: To start using your cryptocurrency wallet, you need to deposit funds. You can purchase cryptocurrencies through an exchange platform or receive them from another wallet. Some platforms allow you to buy crypto using a bank account or credit card.
• Enable two-factor authentication (2FA): Enhance the security of your wallet by enabling 2FA whenever possible. This adds an extra layer of protection by requiring additional verification before granting access to your account.
• Keep your software updated: Stay up to date with the latest security enhancements by regularly updating your wallet software and the software on your connected devices.
• Backup your wallet: It is essential to back up your wallet regularly to protect against potential loss of funds due to device failure or other unforeseen issues. Most wallets offer backup options, such as saving a recovery phrase or seed.
• Consider a multi-currency wallet: If you plan to use multiple cryptocurrencies, consider setting up a multi-currency wallet. This allows you to manage different currencies from a single wallet, providing convenience and ease of use.

Decide how much to invest

The amount you choose to put into crypto will depend on many factors, such as your budget, risk tolerance, and investing strategy. It's important to never invest more than you can afford to lose. Some experts recommend investing no more than 1% to 5% of your net worth in crypto. At Stash, we recommend holding no more than 2% of your overall portfolio in any one cryptocurrency to limit crypto-specific risks.

If you want to invest in a cryptocurrency with a high value per coin, most exchanges allow you to invest on a dollar basis, rather than buying a whole coin. This means you don’t need a huge amount of money to invest in something like Bitcoin. Focus on the total amount of money you want to invest, rather than the number of coins you want to buy.

Additionally, it's important to consider any minimum investment requirements and transaction costs, which vary across crypto exchanges. These fees can add up, especially if you're trading small amounts of cryptocurrency, so it's crucial to look for a broker or exchange that minimises your fees.

If you're new to crypto investing, consider starting small and only using money that you can afford to lose.

Frequently asked questions